June 2015

The Monthly


With this commentary, we plan to communicate with you every month about our thoughts on the markets, some snap-shots of metrics, a section on behavioural investing and finally an update on some of the people at MacNicol & Associates Asset Management (MAAM). I hope you enjoy this information, and it allows you to better understand what we see going on in the market place.

“[The stock market] never can be easy because the rule of the market is that you have to act before you know enough. Because it is a process, there is no one moment, or single point, at which one can make an obvious ‘sure’ decision.” – Justin Mamis


The Numbers:


Market Commentary: “Investing in the Shadows”

A subject which we’ve discussed frequently as of late has been our ‘Barbell Portfolio’ model, which essentially outlines our predominate strategy for managing portfolios. The strategy consists of a balanced portfolio, complete with a mix of large, low risk companies, as well as a smattering of smaller, high growth companies which provide significant upside potential. The ‘Barbell Portfolio’ is balanced by our MacNicol Alternative Asset Trust, and we believe, allows us to achieve our goal of minimizing risk and maximizing return.

In a recent publication, Chris Mayer, an analyst friend from Washington, summarized one of the key benefits of investing in smaller companies, namely, the fact that they have fewer major analysts covering them and issuing research reports. In the publication, Chris references a book titled In the Shadows of Wall Street: A Guide to Investing in Neglected Stocks, which contains a number of pearls of wisdom as to how active managers can add value by investing in stocks with low analyst coverage. As quoted from the book “Security research is like a pocket flashlight: useless in the presence of a bright spotlight, potentially invaluable in the dark shadows.” This quotation references an inherent difficulty in achieving large returns by investing in popular stocks: the prevalence of research and analysis is too large, and there are no surprises. This results in a large amount of transparency in regards to the company’s information and forecasts, as well as accurate stock pricing.  In order to beat the market and add value as an active manager, you need to discover true value and market mispricing, which becomes increasingly possible with smaller companies, or at least those which have less analyst coverage.

The lack of popularity of smaller companies is part of their inherent attractiveness to an independent money manager, as it allows for the identification of true value, and a higher likelihood of mispricing. As legendary investor Peter Lynch states in his book, One Up on Wall Street, the market – and analysts—will eventually find undervalued companies with strong fundamentals. The key is to be able to identify them before they achieve popularity and accurate pricing. In order to do this, we rely on our strong network of financial professionals, and frequently meet with management teams of small, exciting companies. Leveraging this network is a key source of our investment identification process in regard to small, high growth companies.

That being said, including investments in large, stable companies is also necessary in order to reduce risk and volatility. The chart below visualizes the benefit of large cap stocks well. The green striped zones represent periods where large caps outperform small cap stocks, with the yellow zones representing the opposite scenario. This sort of value preservation and risk mitigation during market downturns is the primary reason that we choose to balance our high growth investments with a solid foundation of large cap stocks.


Behavioural Investing: Recency Bias

For the behavioural portion of the monthly, we thought that we would detail the phenomenon known as ‘recency bias’. This bias concerns the investor’s tendency to extrapolate recent performance or events into the future, without the presence of a justifiable thesis outside of the fact that it represents a continuation of the current trend. As an example, as reported by Bespoke, Bloomberg market strategists’ highest recommendation for stock weightings came shortly after the 2001 internet bubble peak, while their lowest recommended equity holding suggestion came shortly after the absolute bottom of the financial crisis.

A current situation where we believe recency bias is prevalent is in regards to interest rates. Many believe they will stay at rock bottom levels for the time being, simply because they have been so low for so long. In contrast, Stanley Druckenmiller offered the following thought experiment.

“If you came down from another planet – or awoke from a coma, or what have you – and were given today’s economic data, where would you suggest interest rates should be? The current global economic environment has uncertainties and is far from booming, to be sure, but interest rates are the lowest they have been in over 100 years; are we currently in the worst economic environment of the last century?” Most of the answers to Mr. Druckenmiller’s thought experiment  concerning where interest rates should be were in the normalized range of 3-5%, and we would agree with that analysis.

This sort of thought experiment represents the key strategy to avoiding recency bias: transcend past data and focus solely on the current environment, and then base your forward projections off of the current environment and trends.



This week’s personal update covers our Research Associate, James Winckler.

James has been with the firm now for over two and half years, joining us out of school from the Richard Ivey School of Business. Since graduation, James has been completing his CFA designation, and last week he completed his Level 2 examination. With the immense time requirement of the program out of the way for the time being, James is looking forward to enjoying the rest of the summer. As a former rugby player, he is particularly excited about the Pan Am games being located in Toronto this year, with a specific excitement towards the Rugby Sevens portion of the games. Some of James’ former teammates and current friends are participating in the event, and he cannot wait to cheer for them on home turf.

James is also moving into a new apartment in the heart of downtown in early July, and is looking forward to the change in environment. Originally from Vancouver, he also hopes to be able to make a trip back home at some point during the summer, in order to visit friends and family. A West Coast man can only stay away from the ocean and mountains for so long.


David A. MacNicol, B.Eng.Sci., CIM, FCSI


Portfolio Manager

MacNicol & Associates Asset Management Inc.

June 2015